NeuroMetrix Inc (NURO) 2012 Q1 法說會逐字稿

Good morning and welcome to the NeuroMetrix first-quarter 2012 conference call. My name is Shenay, and I will be your moderator on the call.

NeuroMetrix is a medical device company focused on diabetes and treatment of the neurological complications of diabetes. The Company currently markets products for the detection, diagnosis and monitoring of diabetic neuropathies such as diabetic peripheral neuropathy and median neuropathy, carpal tunnel syndrome.

On this call, the Company may make statements which are not historical facts and are considered forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature that depend upon or refer to future events or conditions that include words such as believe, may, will, estimate, continue, anticipate, intend, expect, plan or other similar expressions are forward-looking statements.

Any forward-looking statements reflect current views of NeuroMetrix about future results of operations and other forward-looking information. You should not rely on forward-looking statements because actual results may differ materially as a result of a number of important factors, including those set forth in the earnings release issued earlier today. The risks and uncertainties, including the factors described under their heading Risk Factors in the Company's final prospective under the heading Risk Factors filed with the SEC on February 8, 2012, in connection with the Company's public offering and available on the Company's Investor Relations website at www.neurometrix.com and on the SEC's website at www.sec.gov and any updates contained in subsequent SEC filings.

NeuroMetrix does not intend to and undertakes no duty to update the information disclosed on this conference call.

I'd now like to introduce the NeuroMetrix President and CEO, Dr. Shai Gozani. Dr. Gozani?

Thank you. I am joined on the call today by Tom Higgins, our Chief Financial Officer. In this conference call, we will discuss our business strategy, recent developments and financial highlights for the first quarter of 2012. Following our prepared remarks, we'll be pleased to respond to your questions.

Our vision is to develop a premier diabetes-focused medical device business targeting diabetic peripheral neuropathy, or DPN, which is the most common chronic complication of diabetes. This is an underserved market where we are well positioned to add value to physicians and their patients and, through those efforts, to our shareholders.

Our strategy is based on three core initiatives, which I will address individually. The first is to grow our NC-stat DPNCheck diagnostic business. NC-stat DPNCheck is a fast, accurate and quantitative test for systemic neuropathy such as DPN. It is our first diabetes product, and commercial sales began in the first quarter of 2011. Our goal is to create a large base of clinicians using the product and regularly reordering biosensors.

The second initiative is to develop and commercialize our product pipeline. Product development is NeuroMetrix's core strength. We believe our R&D capability is unmatched in the area of DPN. Our next pipeline product is SENSUS, which will be used to help manage the pain caused by DPN. Other products are in early stages of development.

The third initiative is to expand and leverage a multichannel sales and distribution network. Our direct sales organization sells NC-stat DPNCheck into the strategically important endocrinology and podiatry markets. However, we recognize that to accelerate adoption, we need to move into the larger markets of primary care and into the mostly reimbursement and sensitive markets of capitated managed care and retail health clinics. We've made progress against all three initiatives.

First, as far as the NC-stat DPNCheck activity, our DPN testing business continued to grow at a rate that reflects the sales resources we've committed to it. In the first quarter, we recorded 227 device orders, up from 131 in the fourth quarter of 2011. About half the orders came from our endocrinology podiatry direct sales force. Another 40% came from a large order from Wal-Mart Canada, which I will discuss further in a moment. And a final 10% came from various other sources, including international accounts.

Given our progress in this channel, we evaluated the productivity of the direct sales team of eight to nine sales representatives over the past two quarters and decided to increase the sales force to 11 representatives in the second quarter. Ultimately, a considerably higher number may be appropriate.

Revenue from diabetes products was $137,000 in the first quarter, which is consistent with our objective of growing diabetes revenue quarter over quarter. Biosensor reorders have come in from a few early accounts. These are too limited to draw conclusions on reorder trends. However, we are prioritizing reorders in Q2.

We understand the need to help our customers learn how to most effectively adopt NC-stat DPNCheck, and our marketing group is developing programs and materials to accelerate this process. In addition, our sales force has been incentivized to cover reorder opportunities in addition to accruing new accounts.

In summary, we are making steady progress in this initiative to build a base of clinicians using NC-stat DPNCheck.

Now, as far as product development is concerned, our second diabetes product is advancing through development. The SENSUS pain therapy device is a noninvasive transcutaneous electrical neurostimulator intended to be used in the symptomatic relief and management of chronic intractable pain, just painful diabetic neuropathy, which affects as many as 10% to 20% of people with diabetes. It is a serious and disabling complication of DPN.

SENSUS employs the same sophisticated nerve stimulation technology as NC-stat DPNCheck and includes advanced features that we believe may address the technical and clinical limitation of existing nerve stimulators. SENSUS also includes technology to maximize patient compliance, which is one of the fundamental challenges with pain therapy.

Last week, we achieved a key milestone in the SENSUS program when we filed our premarket notification, our 510(k), with the Food and Drug Administration, or FDA, on schedule. Next steps are to work with the FDA through the regulatory clearance process while we prepare for commercialization. We intend to provide additional market exposure for SENSUS at the upcoming American Diabetes Association annual meeting in Philadelphia, which will occur in early June.

We believe that the SENSUS market opportunity may exceed $100 million in the US. Also, we expect that if used in a manner consistent with coverage policies, SENSUS will be generally reimbursed by Medicare and many commercial insurance companies under the durable medical equipment, or DME, benefit. Subject to gaining timely regulatory clearance, we anticipate a commercial launch by the end of 2012.

On the third initiative of expanding and leveraging our multichannel sales and distribution network, the endocrinology and podiatry markets, while central to our strategy, won't be enough to build an attractive business. We plan to accelerate device placements and revenue growth by developing market channel capabilities in US primary care, managed care and retail health.

Primary care covers well over 100,000 physicians caring for an estimated 85% of the diabetes population. Many of these physicians work in small offices with two to five clinicians. Third-party distribution is the most efficient approach to this large market.

As we continue to show success in the endocrinology and podiatry markets, we are creating the appeal necessary to secure effective distribution. Our timetable for initiating primary care distribution is late 2012 and into 2013.

Managed care and retail health are attractive market opportunities. They have concentrated purchasing power and are sold on a corporate-to-corporate basis. Sales cycles can be quite long, but transaction size is much larger.

In terms of scale, there are over 60 million covered lives in managed care and over 50,000 retail pharmacies and over 1500 retail medical clinics. We have organized a small senior-level commercial operations team headed by Balachandran, our Chief Operating Officer, that is dedicated to this opportunity.

In March, we reported our first success. Wal-Mart Canada, a wholly owned subsidiary of Wal-Mart Stores, ordered NC-stat DPNCheck devices and biosensors sufficient to outfit all 91 of its pharmacies, which are staffed by pharmacists who are also trained as certified diabetes educators. The total value of the order was approximately $150,000. In April, we fulfilled the order and trained the Wal-Mart Canada pharmacists. This will be a Q2 revenue event.

While the order was significant in its own right, we believe it indicates the large scope of opportunity in the highly competitive retail health arena. We are beginning to develop a deal pipeline for managed care and retail health and expect to report progress in upcoming quarters.

Our Q1 results confirm the favorable market response that we saw in the prior quarter when we launched NC-stat DPNCheck. Q1 was a solid performance across the business, and we are encouraged going into Q2.

We will now turn to the financials. Tom?

Thanks, Shai. There are two fundamental points we should keep in mind regarding our financials. First is, today the diabetes business has only a minor effect on our revenue and gross margin. It is in the product introduction stage. Most business activity is focused on securing new accounts, which will mature into an active installed base testing with NC-stat DPNCheck and reordering consumable biosensors. It will be a few quarters before that growing, active installed base has a significant effect on the numbers.

Secondly, our legacy neurodiagnostics business accounts for most of our revenue and margin. We are not investing in that business; it is in decline, and we manage it to maximize its cash contribution.

When we restructured this business a year ago, we initiated the conversion of our installed base with single technology platform, the ADVANCE system, in order to supply product support. For over a year, we have been transitioning older technology accounts to ADVANCE. That process was completed at the end of March. And in closing out the consolidation, we recorded a net charge in the first quarter of $157,000 for excess inventory and other related items.

Now, turning to the Q1 financial results that we reported this morning, Q1 revenue was $2.1 million. This included $137,000 in NC-stat DPNCheck revenue, covering both new accounts plus reorders from existing accounts. We shipped 152 new device orders, including some backlog left over from Q4 and a small number of biosensor reorder.

Cumulative device shipments through March 31, the end of the quarter, totaled 271. We are making good progress against our ambitious goal of 1000 device placements by year-end and are forecasting increasing quarterly shipments to reach that goal.

1000 devices in physicians' hands is important because we believe it may represent an inflection point where we will have an adequate number of reference sites for our sales force and will begin to see physician-to-physician referrals and other benefits of customer density.

As Shai, mentioned, the 91-store Wal-Mart order was received late in the quarter and shipped in early Q2. It is not reflected in our Q1 accounting results. The remaining $2 million in Q1 revenue reflected our legacy neurodiagnostics business and consisted of low-margin ADVANCE transition sales and sales of consumable electrodes.

Our Q1 gross margin was 45%. This reflected the $157,000 inventory charge, which I just mentioned. Excluding this charge, Q1 gross margin would have been 54% in comparison with 57% gross margin in the first quarter of last year. The lower margin in the current quarter is due to lower neurodiagnostic electrode sales volume and initial order discounting on NC-stat DPNCheck.

During the remainder of 2012, we expect gross margin to be in the 50% to 55% range, primarily driven by performance of neurodiagnostics.

Our operating expenses totaled $3.7 million in Q1. This was a reduction of $650,000 from Q1 of last year, which had included approximately $200,000 in severance costs.

Research and development and general and administrative costs have been steady over the past several quarters and should continue in future quarters in a fairly tight range to what you see in the first quarter of this year.

Sales and marketing costs will increase with the addition of several new employees and as we head into the more active season for medical tradeshows, where we will be promoting our products. SENSUS launch will also contribute to higher sales and marketing costs later in the year.

We expect that operating expenses will trend upward over the remainder of the year and be in the total annual range of $16 million to $17 million, and likely toward the end of that range -- sorry, toward the low end of that range.

Our net loss was $2.8 million or $0.33 a share based on a weighted average 8.3 million shares outstanding. This compares with a loss of $2.7 million or $0.70 per share in the first quarter of 2011. There was a weighted average 3.9 million shares outstanding in that quarter of last year.

In terms of the balance sheet, we ended Q1 with $15.2 million in cash, and we consumed $2.6 million during the quarter.

Those are the highlights. Back to you, Shai.

Thank you, Tom. Well, those are our prepared comments, so we'd be happy to take any questions that you might have at this point.

(Operator Instructions). Paul Nouri, Noble Equity Funds.

Can you talk about initial utilization by the doctors, like how many sensors they're using a day? I mean, I know it's kind of early, but maybe you could just give us kind of an initial take on it.

We don't have this ability, unlike our legacy business, where the data is typically uploaded to our servers. And so we have visibility on the type of testing and rates of testing. The only way we can judge testing with this business is through reorders. And it's fairly early in the process. So at this point, we really can't make any -- draw any conclusions on testing per day. Our -- kind of our expectation is that a typical physician using the product would test, on average, several times a week, but we just don't have enough data to really back that up yet.

Okay. And how many direct salespeople do you have now?

We have nine people going into -- we added a ninth person during the quarter. And we're expanding to 11 during this second quarter. Right? At this moment, we still have nine.

And I'm not sure if it was in the press release, but do you have the diluted share count?

The total share count today is just a tad under 12.8 million. I can give you the exact number, Paul, in just a minute. So that exact number is 12,786,000 shares.

Do you expect it to go up next quarter, or is that about (multiple speakers) --

Share count? I mean, it will probably remain pretty flat. There might be a few option exercises, but that's not going to change the number substantially, so probably unchanged.

All right. Thanks.

(Operator Instructions). Jerry Stringham, Medical Technology Partners.

Congratulations. Good morning. I have a question on SENSUS system that, I guess, you just filed the 510(k) for. What is the mechanism by which relief is provided for the DPN patient using the SENSUS system?

Sure. So it's based on the concept of transcutaneous electrical nerve stimulation, or TENS -- it's often used by the term TENS -- which has been shown to be effective in a variety of different pain syndromes. But, in particular, it's been shown to be effective in neuropathic pain, like painful diabetic neuropathy.

As far as the underlying scientific explanation, there are a variety of different theories that range from the so-called gate theory, where the signaling is blocked in the spinal cord -- the painful signals are blocked in the spinal cord, all the way up to theories that are based on increased diogenous opioids. So a variety of different scientific theories as to why it works, but the history of transcutaneous electrical nerve stimulation is fairly robust in the area of neuropathic pain when the devices are used as they are intended to be used.

Okay. I know you're aware of the DME payment schedules for TENS-like devices. Is the cost structure suitable for the device? Does it fit in well with the reimbursement that would be available for the end-user, given the way the system is set up now with the TENS code?

We looked at that in significant detail. We believe so. Just as one indicator, Medicare reimburses about -- almost about $400 for a device that they purchase for a patient that needs it on a chronic basis and then either $30 or $60 per month in consumables, depending on whether they need to use so-called two or four leads.

So it's actually a fairly reasonable reimbursement. It's quite cost-effective pain medication or pain medicine, but also a pretty good cost structure for us to work within. We've also done a fair amount of work at this point talking to a variety of DME suppliers and feel that we've got a pretty good business model in terms of our margins as well as the supplier margins.

Great. Is your system unique in a way from, I guess, other TENS devices that are out there, and is there any clinical data on this?

We believe it is. I mean, they're all -- it uses the basic TENS principles. There are quite a few publications about efficiencies in TENS devices and efficiencies in TENS therapy that we've used as -- that have been incorporated as design principles into our device. But as far as specific studies with our device, those have not been done. We will do studies in the future. Those aren't required to launch the product and to get reimbursement. But they would definitely be very valuable in the building the market, and we intend to start those later this year.

Great. Thank you very much.

Sure, Jerry.

There are no additional audio questions at this time.

Very good. Well, thank you for joining us on our Q1 conference call, and we look forward to reporting on our progress as we progress through the year. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.